What is Lease-to-Purchase?
Lease-to-Purchase is sometimes referred to as "lease with option to purchase", "rent-to-buy", or "rent-to-own". Lease-to-Purchase typically begins with a lease period that concludes with an option to purchase the home at the end of the lease. During that time the LTO Real Estate agrees that they will not market the home for sale because they have, in essence, promised to sell it to the Lessee. The first part of the Lease-to-Purchase agreement spells out what the Lessee's monthly rent payment will be, and the second part binds LTO Real Estate to sell to the Lessee at an agreed price the home, provided the Lessee meet the conditions of the agreement.
Who should consider Lease-to-Purchase Homes?
Many individuals find Lease-to-Purchase homes an attractive option.
Previous sales show that the following people often consider Lease-to-Purchase Options:
- Homebuyers who like to invest in real estate;
- Homebuyers fed up with being just renters;
- Homebuyers that want to try out a new school district or new neighborhood prior to making a commitment to it in the long term;
- Homebuyers dealing with damaged credit and who may be currently incapable of qualifying for appropriate mortgage rates because of credit programs;
- Homebuyers who need and want time to get their finances in order before making a home purchase.
What is an Option Fee?
Not to be confused with a rental security deposit, an option fee is paid at the beginning of the lease period. The option fee is 12-15 percent of the agreed-upon purchase price and may be applied toward the purchase of the home. The more the prospective homebuyer puts down as an option fee, the less they will need to have financed somewhere else as the terms of their Lease-to-Purchase Agreement are about to expire.
When buyers sign the Lease-to-Purchase agreements, the option fee must be paid up front. This fee guarantees that the buyer will have the first option to purchase the home. The specific amount of this particular option fee varies from agreement to agreement. Unfortunately, this option fee is non-refundable if the buyer walks away and refuses to buy the property at the close of the contract period.
What is Monthly Rental Credit?
A portion of the monthly rent payment may be set aside as a credit toward the eventual purchase of the home. The amount varies by situation, but is sometimes as high as 100 percent of the rental payment. The obvious advantage to the tenant is that the tenant begins building equity as they rent.
What about Less than Perfect Credit?
Before purchasing any home, homebuyers should get their credit in order. In today's tough economy, many prospective homebuyers have less than perfect credit. Some have gone through foreclosures, others have had to file bankruptcy and some have trouble meeting bill payments due to job loss and other difficulties. While bad credit may not hold buyers back when purchasing Lease-to-Own homes, homebuyers still need to get their credit in order, no matter the reason for the credit problems. Homebuyers should not under estimate the importance of fixing their credit when preparing to purchase a home. The homebuyer's credit score can determine the interest rates on mortgage loans and a credit score that is too low may make it nearly impossible to qualify for a mortgage, especially with the rigid lending specifications today. Lease-to-Purchase homes allow potential homeowners some time to get their credit in order before applying for financing, but credit is still important, even with this window of time to fix bad credit problems. Wasting the time available and failing to improve credit may result in being unable to make the purchase, which will mean all the money spent on the lease option was in vain. This is not something that LTO Real Estate would like to see happen.
Homebuyers that want to improve credit when buying Lease-to-Purchase homes need to carefully deal with any inaccuracies on their credit report. Many individuals investigate and find inaccuracies on their credit report that are affecting their overall credit and credit score. The good news for homebuyers is that clearing up these inaccuracies can help improve their credit. Homebuyers should start by checking their credit reports from each of the credit reporting agencies, including Experian, Trans Union and Equifax. After receiving the credit report, checking each entry for accuracy is essential.
If buyers find any inaccuracies, they can dispute them with the credit reporting agency. Individuals should compose a letter of dispute along with any information that proves the inaccuracy of the entry and send the letter to the credit reporting agency. Any inaccurate entries must be removed by law, which will help buyers improve their credit score so they are better able to attain financing for the lease option home they plan to purchase.
One of the biggest factors when it comes to determining one's credit score is past payments to creditors. If a potential homebuyer has been on time with payments to creditors in the past, that will count in a positive way toward the credit score. Even just a few late payments to creditors can really lower a homebuyer's credit score. As a result, offered mortgage interest rates may be substantially higher than those offered to individuals with good credit.
In some cases, writing a letter to the lender explaining the problem may be helpful. The individual may have dealt with a job loss or an illness that led to the late payments. While not every lender will take this information into consideration, some lenders, such as FHA lenders, will keep that information in mind when deciding whether to approve the home mortgage loan.
What if the lessee's Credit isn't good enough when the lease expires?
Before entering into any kind of agreement a prospective home buyer should speak with a loan officer, tell them their situation and allow them to give them a realistic view of where they will be with their credit within the next year or so. The prospective home buyer should join a reputable credit repair program to get their finances in order. Finally, the prospective home buyer should be responsible for their credit during their Lease-to-Purchase term. Pay off old debt and don't add any new.
Lease-to-Purchase Homes are not for Everyone!
Many prospective homebuyers find Lease-to-Purchase homes to be an excellent option that fits their unique financial and home ownership needs. Those who need time to improve their credit can benefit from lease-to-Purchase properties. Individuals having a tough time qualifying for a mortgage also make great candidates for Lease-to-Purchase homes. Of course, Lease-to-Purchase properties may not be for every potential buyer. Take a careful look at instances where Lease-to-Purchase may not be the best solution.
Homebuyers must have discipline to make a Lease-to-Purchase property work out. For instance, if a homebuyer does not have good credit, then they must work hard to fix the bad credit in order to qualify for the financing needed to buy the home at the end of the lease period. Those who need some time to save up for a down payment must be disciplined enough to work hard to save the down payment money before the end of the lease period so they can make the final home purchase.
Some individuals have bad money habits that have led to financial downfall and without discipline, this home buying option will never work. Homebuyers who do not feel they are disciplined enough to make the changes needed to go this route should consider another option when they are ready to purchase a home.
When entering into Lease-to-Purchase agreement, prospective homebuyers need to prepare to qualify for a mortgage, which will probably be needed to finance the final home purchase. Various things will need to be done to make sure the buyer is ready to take out a mortgage. Buyers need to work on paying the monthly rent amount on time and should also ensure that all other bills are paid on time as well.
Those without credit will need to work to establish good credit in preparation for mortgage qualification. Potential buyers with credit problems will need to take steps to fix those problems before they are ready to apply for a mortgage loan. Individuals unwilling to prepare to take out a mortgage should be ready to make financial changes and take action to ensure they qualify for the needed financing.
Lease-to-Purchase homes require commitment on the part of the homebuyer. The goal of homebuyers is to eventually be able to purchase the home of their dreams. This means that homebuyers must stick with the home until the end of their agreement or they will encounter certain consequences.
If potential buyers are experiencing any indecision before entering a Lease-to-Purchase agreement, it is best to avoid making the commitment until they are ready. Walking away from an Agreement will result in losing the lease option fee as well as the rent paid, so this option works best for those who are sure they want the home before making the commitment. Those who may have to move in the near future or those who may face frequent job changes should probably rethink this home buying option.
Making the financial commitment to purchase a home requires a steady income, no matter the exact method of purchase chosen. To afford rent payments and future down payments, prospective buyers must insure they have a steady income coming in before signing a Lease-to-Purchase Agreement.
Not only is a steady income important when paying the lease payments on Lease-to-Purchase homes, but when applying for financing at the end of the lease period, homebuyers will be required to show lenders proof of steady income. Most lenders require applicants to show steady income for at least the past two years.
The Lease-to-Purchase Agreement
Lease-to-Purchase homes involve agreements that work differently than conventional home purchase or rental contracts. Before signing a Lease-to-Purchase Agreement, homebuyers should be well informed on how the Agreements work. The agreements may be a bit tricky and confusing to some. The following information helps to explain.
When entering a Lease-to-Purchase Agreement, homebuyers will encounter two different kinds of agreements. First, the Lease-Option agreement spells out the rental part of the agreement, noting the monthly rental price and other relevant terms. The second part is the Option Sales Agreement, which deals with the option to purchase the home and relevant terms and information. Understanding and checking both parts of the agreement is essential before signing.
Option Sales Agreement
The option sales agreement is the second part of the Lease-to-Purchase Agreement. The option sales agreement lets the renter/homebuyer have the option to purchase the property. Buyers may purchase the home at any point during the agreement prior to the end of the lease period. This means that LTO Real Estates under obligation not to sell the property to anyone else except for the person who entered into the Lease-to-Purchase option agreement. The agreement essentially holds the property until the homebuyer becomes ready to make the final purchase of the Lease-to-Purchase home within the agreement period.
Buyers Have No Obligation to Buy
Lease-to-Purchase homes offer excellent benefits to homebuyers, since they have no obligation to buy the home. While LTO Real Estates obligated to allow them to buy the home before anyone else, buyers do not have to follow through and make the purchase - they can walk away from the home. If buyers have problems getting financing at the end of the lease period or they find they no longer like the home enough to purchase it, they are able to simply walk away, although they will forfeit their rent payments and option fee.